By ROB CARRICK
Saturday, September 8, 2018
A welcome new development in exchange-traded funds raises questions about the relevance of robo-advisers for people who want a simple, low-cost ETF portfolio.
Balanced ETFs give you a fully diversified portfolio in a single purchase. Your investing future with one of these products is simply to keep buying more of the fund you've chosen because the fund managers handle diversification and rebalancing for you.
That's kind of what robo-advisers do for clients, but with one big difference. While the cost of balanced ETFs is limited to the usual fees charged to investors who own funds, robo-adviser clients pay fund fees, plus an advice charge that is usually in the range of 0.5 of a percentage point.
Are robo-advisers worth the extra cost? The Portfolio Strategy's Balanced ETF-Robo Adviser faceoff will help you decide.
THE PLAYERS ROBO-ADVISERS The upcoming 2018 update of The Globe and Mail robo-adviser guide will tentatively include BMO SmartFolio, Invisor, Justwealth, ModenAdvisor, Mylo, Nest Wealth, Planswell Portfolios, Questrade Portfolio IQ, RBC InvestEase, Responsive Capital Management, Smart Money Capital Management, VirtualWealth, WealthBar and WealthSimple BALANCED ETFS A balanced ETF is a fund-of-funds product that combines underlying ETFs covering all the major investment categories. BlackRock Canada's iShares lineup has long included a pair of balanced ETFs, but they have not been popular. Vanguard has attracted more than $600-million to a trio of balanced ETFs launched in January, which is impressive at a time of intense investor focus on hot, speculative sectors such as cannabis and cryptocurrencies.
Horizons has just introduced a pair of balanced ETFs that are specifically designed for taxable accounts. These products use financial instruments called derivatives to mimic the performance of stock and bond total-return indexes, rather than holding the securities in these indexes. The result is that these funds don't pay out dividends or bond interest every month or quarter like conventional ETFs. Instead, they produce a total return based on changes in the index, plus the index's yield. The net result in a taxable account is that you pay tax on capital gains when you sell at a future date, not on a year-by-year flow of dividends and interest.
GETTING STARTED ROBO-ADVISERS Set up an account and then fill out a questionnaire that will guide the mix of investments in your portfolio. Some robos will provide one of their reps to help you with this process, while others have you do it yourself online. Once your account is up and running, you transfer money into it. Your robo-adviser will take it from there by investing the money for you.
BALANCED ETFS As you can see from the chart, there's a wide variation in the mix of stocks and bonds in balanced ETFs. Pick one that makes sense based on your age and ability to live through stock market crashes without undue stress. A 60-40 mix of stocks and bonds could be considered a baseline for the middle-aged investor.
More stocks could make sense if you're younger, and less if you're older.
You'll need an account at an online broker firm to place orders for the fund you choose. The Globe's online brokerage ranking can help you with that. Buying ETFs is simple - just go to your broker's equity orders screen, indicate which ETF you want and how many shares.
YOUR PORTFOLIO ROBO-ADVISERS According to data provided by individual firms for the Globe's robo-adviser guide, the average number of ETFs in client portfolios is around seven. Some firms use as few as five, others as many as 15. Expect your portfolio to include ETFs covering Canadian, U.S. and international stock markets, plus the Canadian bond market. There may also be exposure to emerging markets, real estate and high-yield bonds.
BALANCED ETFS Except for the two iShares funds, seven seems to be the magic number for individual funds contained in a balanced ETF. Most balanced ETFs stick to basic asset classes such as bonds and Canadian and global stocks, but the iShares funds go well beyond, with exposure to one or more of such sectors as global infrastructure, water resources and preferred shares.
COSTS ROBO-ADVISERS The Globe's robo-adviser guide shows an average 0.25-per-cent management expense ratio for the ETFs used in client portfolios across the industry. Some portfolios are as low as 0.1 per cent, while others are as high as 0.4 per cent to 0.5 per cent. On top of these costs is the advice fee, which is generally set at 0.5 per cent or slightly higher for smaller accounts and often declines to 0.4 per cent when your account gets into six figures. The management fee usually includes brokerage commissions for trading ETFs, but not always.
BALANCED ETFS The Vanguard and Horizons balanced ETFs are comparable in cost to the portfolios designed by robo-advisers. There's no advice fee to stack on top of the fund fees, but there are other costs to consider.
One is online brokerage trading commissions. If you make monthly purchases of your balanced ETF, you'd pay close to $10 at most firms per buy trade for an annual total of $120. On a $20,000 portfolio, that's an additional 0.6 per cent in costs a year.
Two online brokers, Questrade and Virtual Brokers, allow you to buy ETFs with no commissions.
You'll pay the usual charges to sell, however. National Bank Direct Brokerages offers free ETF buy-and-sell transactions as long as you trade at least 100 shares at a time.
Online brokerage accounts with less than $15,000 to $25,000 may also be subject to administration/inactivity/maintenance fees of as much as $100 a year.
STRUCTURE ROBO-ADVISERS Send money to a robo and it gets invested according to your plan.
A robo won't hold your money in cash because it's nervous about buying into a hot or plunging stock market, and it won't deviate from your plan and buy trendy stocks.
BALANCED ETFS The portfolio mix is set for you.
But you place buy and sell orders, which means you're subject to the emotional pull of trying to time the market to avoid crashes.
A risk here is that you end up with a portfolio of do-nothing cash because you're afraid to get into the market.
SUPPORT ROBO-ADVISERS Robo-advisers expect to interact with clients mainly online, but you can call in to speak with a rep if you have questions. Robos also tend to do a good job of showing how your portfolio is performing in a clear way.
BALANCED ETFS Because you're using an online broker, there is zero support in managing your investments. Performance reporting online is dependent on your broker's website and in some cases would be rudimentary at best.
CONCLUSION Have the knowledge to invest for yourself, but not much time or interest? Go with balanced ETFs - they're cheap and simple, yet precise in giving you a sound portfolio in a single purchase.
Want a turnkey solution to investing, with all the work done for you in an effective, reasonably priced way? Try a robo-ad viser.
CARRIE COCKBURN/THE GLOBE AND MAIL, SOURCE: ETF COMPANY WEBSITES